The Commodity Futures Trading Commission (the “CFTC”) recently issued a proposed rule regarding commodity pool operators (“CPOs”) that would rescind the exemptions from CPO registration under CFTC Rules 4.13(a)(3) and 4.13(a)(4). These exemptions are widely used by hedge fund and other private fund managers advising funds that trade futures and other listed commodity positions, such as commodity options or swaps. If adopted, managers, sponsors and operators of such funds would need to register as CPOs with the CFTC and become members of the National Futures Association (the “NFA”). The proposed rule does not have a transition period or any grandfathering provisions.

Full registration as a CPO is a time consuming process and typically takes six to eight weeks. Unlike hedge fund and other private fund managers currently taking advantage of the exemptions under CFTC Rules 4.13(a)(3) and 4.13(a)(4), registered CPOs are subject to full regulation by the CFTC and NFA. As a result, registered CPOs must comply with rules that require them to provide disclosure documents to investors (which are subject to review by the NFA) and fulfill recordkeeping and reporting requirements, including the delivery of audited annual financial statements. Although registered CPOs may continue to rely on CFTC Rule 4.7 for relief from certain disclosure, recordkeeping and reporting requirements, the proposed rule would require CPOs relying on CFTC Rule 4.7 to deliver audited annual financial statements to investors.

The proposed rule would also require hedge fund and other private fund managers that are currently exempt from registration as commodity trading advisors (“CTAs”) because they only advise funds that are exempt under CFTC Rules 4.13(a)(3) and 4.13(a)(4), to register as CTAs with the CFTC and become members of the NFA. Once registered as a CTA, a hedge fund and other private fund manager would be subject to all of the CFTC and NFA’s requirements applicable to CTAs.

The CFTC has requested comments during the 60-day period beginning on Friday, February 11, 2011. If the proposed rule is adopted, the CFTC will issue a final rule that will specify when hedge fund and other private fund managers relying on CFTC Rules 4.13(a)(3) and 4.13(a)(4) will need to revise or cease their commodity interest trading or register as CPOs (and, if applicable, CTAs) and become members of the NFA.

The text of the proposed rule can be found here: http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-2437a.pdf

We will update you with more information as it becomes available.